Malta’s Constitutional Court has confirmed that the Financial Intelligence Analysis Unit is empowered to impose large fines for regulatory breaches, overturning a lower court’s ruling which threatened to de-fang the agency.
What happened?
On Monday, Chief Justice Mark Chetcuti, presiding the Constitutional Court with judges Giannino Caruana Demajo and Anthony Ellul decided the constitutional case filed by Phoenix Payments Ltd against the Financial Intelligence Analysis Unit and State Advocate. In that case, Phoenix Payments had been contesting a €435,576 fine imposed on it by the FIAU in terms of the Prevention of Money Laundering and Funding of Terrorism Regulations.
What is the context?
In 2020, FIAU reviews had discovered shortcomings in Customer Due Diligence measures and the ongoing monitoring setup at Phoenix Payments and so had invited the company to make its submissions on the findings and to provide documentation to back those submissions up.
During a meeting of the FIAU’s Compliance Monitoring Committee in July 2021, the committee – composed of the unit’s director, the secretary and the Heads of the FIAU’s legal affairs and enforcement departments – noted regulatory breaches by the company and imposed an administrative penalty of €454,293. No representatives of the company were present for that meeting, nor had their presence been requested.
Phoenix Payments had filed a constitutional case the following year, claiming to have suffered a breach of its right to a fair trial by an independent and impartial court established by law, while also accusing the FIAU of acting arbitrarily and abusing its powers.
The FIAU had counter-argued that it was not a legitimate defendant and should be non-suited, as its functions emerged from the law. Those functions did not include the creation of the legal framework which Phoenix Payments was claiming to have resulted in a fundamental rights breach, it said.
March 2023: Court of First Instance
The court of first instance handed down its decision a year later, in March 2023. It agreed that the FIAU could not be held liable for fundamental rights breaches, but held that besides the law itself, the case was also challenging the methods adopted and the investigative process which had informed the FIAU’s decision. Crucially, it also upheld the plaintiff’s assertion that the financial penalty imposed on it by the FIAU was a sanction of a criminal nature, which amongst other things, rendered additional fair trial safeguards applicable.
November 2024: Constitutional Court
Both the FIAU and State Advocate had subsequently filed appeals to the March judgment.
In Monday’s decision, the three presiding judges observed that the application of the so-called “Engel criteria,” – which are used by European courts to establish whether a case was dealing with a ‘criminal charge’ as defined in the European Convention on Human Rights – should not have led to the conclusion that the sanction imposed was criminal in nature and that, as a result the constitutional rights Phoenix Payments had invoked did not apply.
Examining European jurisprudence and scholarly publications at length, they held that a wide interpretation should be given to the Constitution’s use of the words “criminal offence.” Although Malta’s Constitution had become law long before the creation of the Engel criteria, the courts had still applied them in other cases involving administrative sanctions, a line of jurisprudence which the Constitutional Court judges said they would continue to follow.
The Constitutional Court pointed out that the FIAU’s decisions remain subject to revision by the courts, and the Court of Appeal that would be hearing Phoenix Payments’ appeal would have the opportunity to examine the issue of whether or not the administrative fine was disproportionate. It was also empowered to hear witnesses and receive documentary evidence, as required.
The judges declared that articles 13(2) of the Prevention of Money Laundering and Funding of Terrorism Act and regulation 21 of the Prevention of Money Laundering and Funding of Terrorism Regulations did not breach Article 39(1) of the Constitution, which enshrines the right to a fair hearing before an independent and impartial court.
Why is this so important?
The issue until now was the Maltese courts’ very rigid interpretation of the law, first adopted in the 2016 Constitutional Court judgment Federation of Estate Agents vs Director General (Competition) et, where the court essentially held that the legal process would be vitiated by the mere fact that an administrative authority had imposed a fine.
The reasoning in yesterday’s judgment now brings Malta much closer to the position currently obtaining in ECHR jurisprudence, where the standpoint is, fundamentally, that what is important is that the issue can, ultimately, be brought before a court exercising jurisdiction.
Perhaps the most important consequence of Monday’s judgment is that it confirms the FIAU’s power to impose fines, because – in terms of the court’s reasoning- what matters is that those fines can ultimately be contested before a court.
This is obviously very important for the FIAU. Had the first court’s judgment been confirmed, a radical overhaul of the FIAU’s legal framework would have been required and until the necessary changes were made, the unit would have been rendered ineffective, because any fines it would impose would be subsequently declared unconstitutional.
The effects of this judgment may, in fact, be even more wide-ranging. Other administrative bodies operating in similar legal frameworks, the Competition Directorate for example, had, until yesterday, also been under the same shadow. How they will respond to their newly-lengthened leash remains to be seen.
We will continue to monitor developments closely as it is understood that there may be a further referral to the European Court of Human Rights, in future.
